Rate rise may hit growth: FM

A day after RBI’s tight monetary moves, Finance Minister Pranab Mukherjee on Friday agreed with industry chambers that rise in policy rates could impact growth, but asserted inflation is a challenge in the short-term which if not checked could have negative ramifications for economic expansion.

In this scenario, fiscal profligacy could be disastrous, he said while addressing an Assocham banking summit. Even though RBI actions could dent economic growth, the finance minister was hopeful this financial year, the economy could repeat its performance of last financial year.

This means economic growth of 8.5 per cent for this financial year is not as bad in wake of slowdown in interest-sensitive sectors like auto. It also shows 0.5 per cent lower growth than projected 9 per cent in the Economic Survey.

He, however, said drivers of economic expansion remained intact and asked states to come forward in accelerating the growth rate. “The monetary policy has been gradually tightened... Monetary measures may end up moderating the growth if they have to be persisted for an extended period of time,” Mukherjee said.

He said as the government geared itself up for preparing the 12th Five-Year Plan (2012-17), “We need to aim at a GDP growth of 9 to 9.5 per cent for the Plan period.” For this expansion in GDP, the country’s economy must grow at an average rate at least one percentage point higher than the 8.2 per cent rate likely to be realised in the 12th Plan.

He, however, said in the short-term, moderating aggregate demand was critical to check inflation, which is “our major challenge”. To cool down inflation, standing at over nine per cent in May, the RBI had yesterday raised repo (short-term lending) rate by 25 basis points, which automatically means that reverse repo (short-term borrowing) rate also went up by 25 basis points.

Mukherjee expressed concern over the “asset quality” of banks. “It is important for the banks to constantly monitor and bring down the NPA to the previous level,” he said. The finance minister said consolidation of banking services, consistently meeting the capital adequacy requirements, leveraging advanced technology, and effectively managing human resources with a focus on pro-active leadership are emerging as major areas of concern for Indian banks that need to be addressed.

He said the government was in the process of deepening policy reforms in the financial sector and addressing gaps in overall economic regulatory architecture. A Financial Sector Legislative Reforms Commission has been set up to re-write financial sector laws.

“The RBI is in the process of issuing additional banking licences to private sector players and discussions are underway to further liberalise the FDI policy. Major steps are being taken to simplify and place the administrative procedures concerning taxation, trade and traffic and social transfers on electronic interface, free of discretion and bureaucratic delays,” he added.

The finance minister also sought the support of all political parties for the passage of the Direct Taxes Code (DTC) Bill and a Constitution amendment legislation to roll out the Goods and Services Tax.